Hero scripts route to split with Honda

The Brijmohan Lall Munjal family, promoters of the Hero Group, have finalised the road map to part ways with Honda Motor of Japan, their equal partner in the country’s largest two-wheeler maker Hero Honda Motors.

Currently, Munjals and Honda hold 26% each in Hero Honda. Munjals’ stake is held through two companies — Hero Investment (HIPL), a non-banking financial company with 17.33% and Bahadur Chand Investments (BCIPL), an investment company with 8.67%.

The Munjals will need to raise around Rs 9,500 crore to buy out Honda's stake in Hero Honda. To start with, Munjals will sell 45% stake in HIPL to raise Rs 4,250 crore. The stake is proposed to be sold to global private equity players like Bain Capital, Carlyle Mauritius, Singapore’s Indivest, Zend Mauritius, TPG and Redwood Investment of the Warburg Pincus Group.

After raising Rs 4,250 crore from PE firms, Munjals will raise the balance amount through bridge loans and buy out the entire stake held by Honda. Once the deal is complete, HIPL and BICPL will jointly own 52% stake in Hero Honda. By virtue of their 45% stake in HIPL, PE firms will also hold an indirect stake. With the exit of Honda, this will bring the curtains down on the 27-year old two-wheeler joint venture.

Since selling HIPL stake to overseas PEs involves foreign investment, Munjals have filed an application with FIPB. A copy of the application is with FE. On Thursday, Hero Honda shares closed up 2.79% on BSE at Rs 1,565 while the Sensex closed up 1.98% or 358.69 points 18,449.31.

The application states that HIPL and BCIPL will acquire Honda’s 26% stake in one or more tranches. “The share transfer will not trigger open offer requirements. Further, the share transfer will be in accordance with the applicable pricing guidelines issued by the Reserve Bank of India from time to time and all other applicable laws,” The Hero Group said in its application.

As is known, the Hero Group and Honda Motor entered into a memorandum of understanding on December 16, 2010 in which the former agreed to buy the latter's stake and end joint venture agreement between them. However, the two did not announce the structure of the deal and the price at which it would be transacted.

FE was the first to report on the impending break-up of the Hero Honda JV in its edition dated August 3, 2010. It is understood that the problem between the partners started when Honda made technology renewal subject to the condition that Hero Group steps up sourcing components and other raw materials from the wholly-owned spare parts division of the Japanese automaker Honda Motor India.

Munjals were reportedly not keen to do so since it has sourcing contracts with several component-makers. A chunk of sourcing is also done through Hero Group's automotive parts business.

The basis of the JV agreement between the two is a technology agreement which gets renewed every 10 years and will now lapse in 2014.

Honda, however, would continue to be present in the Indian two-wheeler market through its 100% subsidiary, Honda Motorcycle and Scooters India Ltd.